BKLN - How recent bank stresses can lead to lower lending activity

2023-04-23 15:11:00 ET

The angst over banks' stability has calmed significantly since mid-March, but it's not completely over, according to industry and economics watchers.

One tangible sign: Banks' increased their borrowing from the Federal Reserve. For the week ended April 19, banks' borrowing from two of the Fed's programs — the discount window and the recently created Bank Term Funding Program — rose by $4.44B to $143.9B, its first increase in five weeks.

Banks' balance at the deposit window rose to $69.93B for the week, up from $67.63B in the prior week. Their balance at the BTFP increased to $73.98B from $71.84B in the previous week, according to Fed data.

"Overall, acute systemic risks have eased, and the focus has shifted to how much the combination of failures and slowing growth will impact bank loan growth," 22V Research's Dennis DeBusschere said in a note to clients Friday.

"How much tighter lending is impacting demand is difficult to measure in real time," he added. One metric DeBusschere likes to look at is liquidity sentiment, the best category assessing the availability of cash. "So far, liquidity ex-financials remains in its 92nd percentile. We will track this through earnings season, but so far company management are NOT signaling a decline in the availability of cash/credit," he said.

The turmoil from the failed banks adds to credit tightening that had already started due to the Federal Reserve's move to tighten monetary policy.

Fitch Ratings is looking further ahead and expects the Fed's quantitative tightening program to weigh on liquidity, and potentially more restrictive credit conditions. And that has broader implications for U.S. economic growth. "Tighter liquidity could exacerbate the ongoing shift to more restrictive credit conditions, weighing on US growth," said Fitch Ratings Chief Economist Brian Coulton in a recent note.

QT will signficantly reduce liquidity in the U.S. commercial banking system over the next year as the aggregate level of bank reserves held at the Fed falls, Fitch said in the report.

"System-wide banking liquidity indicators are still robust, but our baseline projection is for reserves to fall significantly by $900B to $2.5T by year-end," according to the Fitch report. A faster decline in reserves is possible if banks increase their usage of the Fed's reverse repo facility. The RRP has pulled $2.6T from reserves as money market funds lend overnight cash back to the Fed, it said .

Credit conditions had already been tightening since early 2022, said Evercore ISI's Krishna Guha in a note on Friday. "Credit tightening has been going for some time, but the SVB shock could — likely will — introduce an additional element, and could in principle result in a material deviation from the prior trajectory and normal relationships with macro variables," Guha wrote.

Market-based proxies for credit tightness have eased since the onset of the banking turmoil, he noted. Rather, he'll be focused on the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS), which is due to be released May 8. "The upcoming SLOOS results will provide an initial read on what immediately changed with the March shock," Guha said.

He also saw clues in this week's Beige Book for what the SLOOS may show. The Dallas Fed survey showed continued additional tightening, but not at a substantially faster rate than already seen this cycle, he said.

When Evercore ISI attempted to "nowcast" SLOOS using a number of mostly market-based data and methods, the calculations suggested that "it may not show a material increase in the share of banks tightening (which was already high) and the share could even dip slightly," he said.

Jim Caron, co-chief investment officer at Morgan Stanley Global Balanced Funds, predicts that "there is going to be a credit crunch, not a credit crisis."  That means the reduced availability of credit will "take place over a long period of time," he said in an interview on Bloomberg Television.

Companies that rely on leveraged loans may be the most at risk due to their low ratings and use of floating rate debt. Some 25% of the $1.4T market has a B- credit rating, on the verge of a CCC grade that sharply reduces access to Wall Street borrowing, Bloomberg reported , citing Pitchbook LCD data.

Some tickers for senior loan and floating rate debt funds and ETFs: NYSEARCA: BKLN , BATS: BRLN , NYSE: EFT , NYSE: FRA , NYSE: JFR , NYSE: NSL , SNLN .

More on the Bank Crisis and Recession:

• Bank stresses bring economy closer to recession, Minneapolis Fed’s Kashkari says
• Banking Crisis Consequences And Opportunitie
• Banking crisis boosts risk of recession, JPMorgan’s Dimon says
• Why This Banking Crisis Makes A Recession More Likely

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